In a move likely to have significant impacts on corporate governance, a group of institutional investors managing upwards of US $17 trillion has announced the formation of the Investor Stewardship Group (the Group). The Group has adopted a framework of certain non-binding investor-friendly principles, many of which are either common or already legally recognized in Canada, illustrating one of Canada’s greatest attractions as an investment destination: its strong protections of investor rights. On the other hand, the Group takes a skeptical view of a common practice in Canada: dual-class share structures.

The Group

The Group is a collective of some of the largest U.S.-based institutional investors and global asset managers, along with some international counterparts. The Group so far has 12 members, including Blackrock, Fidelity, T. Rowe Price, and RBC Global Asset Management. The Group hopes to “establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct.” It aims to do this through six “Stewardship Principles” for institutional investors and six “Corporate Governance Principles” for US-listed companies. The Group has announced that its framework will come into effect on January 1, 2018 in order to give companies time to adjust. While the framework is not intended to be “prescriptive or comprehensive”, or to remain static, it lays down clear principled expectations for US-listed companies and their institutional investors.

The Principles

Each principle contains rationales and a list of specific practices to be encouraged or discouraged. Some important examples include:

Majority voting: directors who do not receive a majority of votes cast with respect to their election should resign.

Annual election: directors should be elected annually.

Right to nominate directors: shareholders who own a “meaningful stake” in the company and have for a “sufficient period of time” should be able to nominate directors and have them featured on the management proxy

Dual-class shares: companies should adopt a one-share-one-vote standard. Companies with multiple classes of shares should re-evaluate their share structure on a regular basis or as company circumstances change, and establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.

Board composition: should be majority independent. The leadership should also be strong and independent. The Group states that some members prefer an independent chairperson, while others view a lead independent director as sufficient.

What it means for Canadian companies

The Corporate Governance Principles are intended to apply only to US-listed companies. Nonetheless, they indicate the views of investors who are likely to feature among the largest shareholders in many Canadian public companies.

Some of the specific policy proposals are already common or required in Canada. As we have detailed on this blog before, the TSX rules require a majority voting standard and annual elections, and recently proposed changes to the Canada Business Corporations Act will require these of all federally incorporated public companies.

Among the more notable aspects for Canadian issuers is the strong statement against dual-class share structures, which are unusually popular in Canada. As recently as 2005, 20% of TSX-listed issuers had multiple classes of shares, versus just 2% in the US. While they remain popular among investors and issuers, many Canadian institutional investors and commentators have come out strongly against dual class shares, generating an evergreen debate on the subject.

The actual impacts on the voting practices and portfolio composition of Group members remain to be seen. Nowhere has the Group stated that dual-class companies must abolish their dual-class structures. Rather, the framework suggests that dual-class companies should re-evaluate their share structure on a regular basis or as company circumstances change, in order to make clear to investors why a dual-class structure remains in that particular company’s best interests. In any event, though, Canadian public companies should recognize that a powerful and important voice has joined the line of skeptics of dual-class structures.

The author would like to thank Joe Bricker, articling student, for his assistance in preparing this post.

Stay connected with Special Situations Law and subscribeto the blog today

About

Norton Rose Fulbright's Special Situations Team has played a leading role in Canada’s most high-profile shareholder activist and defence mandates, as well as complex reorganization transactions. The Special Situations Law blog is about sharing our insights with you. With videos discussing shareholder activism, links to relevant case law and legislation and incisive commentary about regulatory and legal developments, our blog includes a wealth of resources and perspectives on special situations law.